Europe has a peculiar problem. As one of the world's largest economies, we have the talent, capital, technology, and market size to compete. Yet we struggle to turn these advantages into economic success. Our companies face barriers to expansion, our savings fail to finance innovation, and productivity growth has disappointed for decades.
Meanwhile, the world is racing ahead. Global competition is intensifying, technological change is accelerating, and Europe's security environment has fundamentally changed. However, we all know – there can be no geopolitically strong Europe without a strong European economy. We know what needs to be done. The harder question is why progress lags and whether Europe is prepared to make the necessary choices to speed things up.
These questions will be at the centre of the Latvijas Banka Economic Conference on 11 November.
Germany's transformation is a test for Europe
Two decades ago, Germany reemerged from being the "sick man of Europe" to be Europe's industrial powerhouse. Competitive manufacturing, cheap energy, and strong demand from China were the basis of a once successful growth model. That world has moved on. Energy is more expensive, China has become a ruthless competitor, an ageing population increases social spending needs, and technological advances are reshaping manufacturing. Germany's challenges are structural in nature. Its growth model must change to be fit for both today and the future.
Germany has an advantage that many European economies lack: strong public finances. Adapting to today's realities and investing where it is most needed are long overdue. What matters is whether spending on infrastructure and defence removes bottlenecks, attracts private investment, and raises productivity.
A major national investment programme can also generate lasting economic gains across Europe, as Germany's investment decisions affect businesses and workers far beyond its borders. The better the European common market functions, the greater the potential for German investment to strengthen Europe's productive capacity.
For Latvia, stronger German demand is welcome, with the greater opportunity lying in participating in the investment and technological transformation that follows. Germany's political and security role also makes a successful economic transformation increasingly urgent. At our conference, Bundesbank President Joachim Nagel will discuss how Germany can turn its fiscal opportunity into lasting economic strength, and what this means for Europe.
One Europe, one market. Why are we still waiting?
The EU has around 450 million consumers and accounted for about 18% of world GDP in 2025, compared with 26% for the United States and 16.5% for China. Germany alone accounted for 4.3%.[1] Germany cannot match their scale on its own. The EU, acting as a genuinely integrated market, can.
Our problem is not a lack of scale, but our fragmentation into national markets is. Internal barriers make scaling up exceedingly difficult. Fragmentation limits competition, discourages investment, and prevents firms from achieving economies of scale.
Why invest in becoming globally competitive if a protected position in a national market offers comfortable returns? National champions are politically attractive, but protecting them comes at a considerable economic cost. What are we really fighting for: a dominant position in a small domestic market or the opportunity for European companies to compete globally? We need a larger, competitive market where productive and innovative businesses can grow.
One Europe, one market. We have talked about it for decades. The fact that we are still discussing it reflects the difficulty of putting European economic interests ahead of narrower national ones. A large share of nothing or a smaller share of something? Economically, it’s a no-brainer. Geopolitical and technological developments make it urgent.
Europe's savings need a European market
Nowhere is the cost of fragmentation more apparent than in our financial markets. They are not fit for purpose, not fit for the future. Europe has substantial savings, but too little reaches productive investment. The money is there. We need a financial system that puts it to work and takes the risks that innovation and business growth require.
Banks are indispensable, but they cannot meet every financing need. Young technology companies need equity and venture capital from investors prepared to accept uncertainty and risk. European companies may seek financing or move activities elsewhere. We invest in talent and ideas, but do not always create the conditions for their commercial success.
The Savings and Investments Union is therefore central to Europe's competitiveness. Integrated financial markets would broaden households' options for long-term investment and give businesses, including Latvian firms, access to a European pool of risk capital.
Why, then, has progress been so difficult? Regulatory and institutional differences are part of the answer. But fragmentation also has beneficiaries. National authorities may be reluctant to relinquish responsibilities. However, what benefits individual players does not necessarily benefit Europe's economy.
We cannot demand globally competitive businesses while defending structures that constrain their growth. Europe needs competing financial firms offering services across borders, aligned rules and supervision, and no unnecessary national burdens on top of EU requirements. At our conference, European Commissioner Maria Luís Albuquerque will discuss how to turn the Savings and Investments Union from an ambition into an economic reality.
Europe knows what to do. Will it do it?
Europe does not lack competitiveness reports, strategies, or declarations. Mario Draghi's and Enrico Letta's 2024 reports have analysed the problems extensively.[2] The direction of required reform is largely understood. What lags behind is implementation, particularly when European economic interests conflict with established national arrangements.
The economic case for acting together is strong wherever scale matters. We already have the institutions; they must now decide on common regulation and centralised supervision, clarify national responsibilities, and implement those decisions. That would put Mario Draghi's pragmatic federalism into practice.
For Latvia, these are very practical questions. Deeper integration creates opportunities our domestic market cannot provide. However, access alone does not guarantee success. Businesses still need to compete, innovate, and grow. European integration cannot substitute domestic reform, just as domestic reform cannot substitute access to a larger European market. We need both.
Europe has the scale, resources, and talent to succeed. What we need is the willingness to dismantle the arrangements that prevent us from doing so. We Europeans can and should do better. Time is of the essence: being slow and indecisive means falling behind and losing out. On 11 November, at the Latvijas Banka Economic Conference From Policy to Impact. Europe's Economic Future, we will discuss these choices with leading European policymakers and economists.
It is obvious that Europe needs to change. The direction of required transformation is equally clear. The question is how to push the accelerator and get into the fast lane.
Find the full agenda and livestream details on the Latvijas Banka website
[1] World Bank, World Development Indicators, GDP (current US$), 2025, indicator NY.GDP.MKTP.CD. Shares of world GDP calculated at current exchange rates, not purchasing power parities.
[2] Mario Draghi, The future of European competitiveness (2024); Enrico Letta, Much more than a market (2024).